Everywhere you look, it seems like there’s a new headline warning of a
. The stock prices of major retailers like Target, Walmart, and Lowe’s have declined substantially after earnings stumbles. Layoff announcements, hiring freezes, and slowdowns at big tech companies like Facebook, Snap, and Uber are on the rise, and the venture-capital community is souring on the outlook for once high-flying growth companies.
But for all the doom and gloom, I don’t think we’re headed for a recession.
The pandemic was an economic shock that produced clear winners and losers. Now that we’ve reopened the economy, many of the winners from the early part of the shutdown and recovery are seeing their fortunes change. The losers of this latest shift — most notably tech companies and those big-box retailers — are prominent, and their problems are generating disproportionate interest. But while these industries may face a kind of localized “recession,” the US economy is still expanding, and the likelihood of contagion that would lead to a true recession remains low.
Less stuff, more services
The first reason for all the recession hullabaloo is a misguided conflation of the slowdown in spending on durable consumer goods — big-ticket items like washing machines, diapers, laptops, and cars — with a broader recession.
As people were stuck inside during the pandemic, spending on physical goods skyrocketed. This makes intuitive sense: People were spending a lot of time at home, so they bought stuff they could use there. But spending on goods peaked over a year ago and has declined by about 5% since March 2021. Recent reports from retailers suggest that consumers continue to spend less on goods. This also makes sense: If people aren’t at home as much, they no longer need all that home-related stuff.
But this does not mean that consumers are suddenly spending a great deal less overall. They’re just shifting where they spend.
American consumers are picking up the pace across the service industries. They’re going out to restaurants, heading to the movies, and taking to the skies. Data from the travel-booking site Kayak indicates that flight search interest on May 22 was up 22% compared with the same day three years ago and that searches for international flights are at fresh highs. People don’t research expensive overseas trips when they are worried about a recession at home.
And people are still buying things — they’re just different kinds of things. Executives at Target, whose stock collapsed by nearly 40% after reporting worse-than-expected earnings in mid-May, said during a call with Wall Street analysts that consumers’ spending was shifting “more toward experiences and going-out categories,” or things like luggage, beauty products, and clothing.
That’s the real story here: Spending is shifting, not declining. And a shift in spending does not signal a recession.
Tech tanks — but tech isn’t the whole economy
This transition back to services and experiences has dealt a serious blow to another big winner of the pandemic: the tech industry. One reason stock markets did so well initially in the pandemic is that tech and tech-adjacent firms that benefited from people staying at home — online shopping,
entertainment, social media — make up an outsize portion of the major US stock indexes. As these companies raked in money, the market boomed along with them. Now this dynamic is working in the opposite direction, and those same companies are seeing major slowdowns. Correspondingly, the stock market is experiencing a sharp decline.
A similar phenomenon is playing out in the labor market. Several firms have announced hiring freezes or layoffs, including Meta (formerly Facebook),
, Uber, and Peloton. Folks are spending less time at home or on social media and more time at gyms and on public transit. Who needs food delivered when they are now comfortable going out to eat? Hiring slowdowns or small rounds of layoffs at companies in a handful of industries — no matter how high-profile — is normalization, not recession.
The clearest sign that these tech stumbles aren’t a canary in the coal mine for the broader economy comes down to a fundamental function of the market. One reason interest rates have risen is that economic growth is more widespread. Instead of a few uniquely positioned companies sucking up most consumer spending, an array of industries are open and getting a slice of the pie. This sort of broad-based strength is the opposite of what the recessionistas want you to believe. Higher rates also mean that making bets on future returns from high-flying tech companies isn’t as appealing as investing in bread-and-butter companies with strong profits. Why roll the dice on a tech startup when the outlook has improved for a traditional industrial conglomerate?
Meanwhile, people keep spending
Despite the warnings from tech companies and panic from the commentariat, the biggest driver of the economy — average Americans’ consumption — continues to expand at a solid pace. According to the Bureau of Economic Analysis, real consumer spending has advanced by 2.6% at an annual rate over the past two quarters. And according to the GDPNow tracking estimate from the
Bank of Atlanta, consumption for the current quarter is running close to a healthy 5%.
Still not convinced? Weekly data on payment-card transactions tell the same tale. According to the Bureau of Economic Analysis, for the week ending May 10, total card spending on retail and food service rose by an estimated 11% against a prepandemic baseline. Bank of America CEO Brian Moynihan made a similar observation using the firm’s consumer data.
So why are consumers still spending despite the sour news? I think it boils down to three factors:
- The labor market is strong. Unemployment remains incredibly low, and workers are enjoying increased compensation. Aggregate wages and salaries have been growing by about 8% at an annual rate so far this year.
- Households have plenty of room to take on more debt. As an example, the ratio of revolving credit — short-term borrowing through credit cards and similar accounts — to disposable income is still more than a half percentage point below where it was just before the pandemic. This means that even as rates rise, households have the ability to safely take on more short-term debt without getting into serious financial trouble. As households continue to borrow and banks remain willing to extend credit to those consumers, Americans can continue to spend.
- Households continue to sit on savings. Excess saving — the amount of extra cash households have on hand after cutting back on spending, stashing their stimulus checks, and incorporating other pandemic changes — remains close to $2 trillion. Whether consumers spend out of this savings hoard remains to be seen. But at a minimum it’s a buffer in the face of economic shocks.
Despite all these positive indicators, the spectrum of recession seems to be dominating Americans’ thinking. I mentioned in April that Google search traffic for “recession” had been soaring.
Bottom line: The economy is not in recession, but it is normalizing after a highly abnormal period. There are winners and losers in this process. Focusing on the losers is understandable, since many of these firms loom large in our culture and have big footprints in the market. But in the final analysis, normalization is necessary and welcome.
The normalization of spending on goods is likely to lead to slowing price growth, helping rein in inflation while maintaining a relatively strong labor market. Normalizing also makes it less likely that the Federal Reserve will drastically hike interest rates, a move that would actually elevate the risk of recession. And ultimately, normalizing should be the goal as we try to keep the economy out of recession — even if there are bumps along the way.
Neil Dutta is Head of Economics at Renaissance Macro Research.